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Investment Riches Built on Subprime Auto Loans to Poor

62 points by yablak 12y ago

heck818 12y ago
Why not? There are winners and losers in every game.
grandalf 12y ago
The way bankruptcy laws are, 20% is probably pretty reasonable considering that the vehicle's value decreases pretty rapidly. I'm curious whether companies like Affirm will figure out ways to improve upon this.
- cowsandmilk 12y ago
  If you have good credit, you can get rates under 2% on a new car and your lender will negotiate a lower car price for you since that will lower their risk. If you have poor credit, you likely will end up at a sleazy dealership that overcharges you on the price and you end up with the 20% interest rate to take care of the risk.
  - grandalf 12y ago
    Yep that's b/c the lender has drastically different levels of risk in each scenario. If you're a bank, you get negative overnight rates.
  - stephenbez 12y ago
    How do you get a lender to negotiate a lower car price for you?
    - grandalf 12y ago
      To the extent that the collateral value of the purchased item impacts the lender's overall risk, all lenders have an incentive to drive down the purchase price to reduce risk (since this reduces the difference between the loan amount and the collateral value). The value of that risk reduction is relatively insignificant to the lender, but some offer services like that (car buying services) to help attract desirable borrowers.
icehawk219 12y ago
The ease with which huge amounts of credit are given to people who clearly shouldn't receive it is quite scary. When I was 18 I had a decent enough job as a fledgling software developer making above average for my age but still not great. My car broke down and I decided to get a new one and as a stupid 18 year old with access to some money and credit I of course set my eyes on a nice shiny, new off the lot, convertible. $20k in debt later I drove off the lot. And they were nice enough to throw in a brand new Bank of America credit card with a $10k limit on it too! It of course didn't take long for me to nearly max that out and end up with a crash course in credit that I wish I'd had beaten into me years earlier or that I was smart enough to figure out sooner. At 18 and making around $35k pre-tax I already had close to $30k in debt and the scary thing is that that situation lead to me getting bombarded with mail offers for more credit cards (including many different Bank of America cards) that I was supposedly pre-approved for. Now that I keep very little debt, besides my mortgage my 2 open cards have a balance of $0 on them 6 days out of 7, I get basically no offers. Education would go a long way to preventing what happened to me from happening to others but I can't help but suspect a healthy dose of tighter regulations, or restrictions, or ... something, should be put into place too. I now know I was a stupid kid who made stupid mistakes. I've also learned from them. But I was also someone in one of the few industries that's still growing and was able to recover fairly easily and never really felt any pain from it. The average person isn't that fortunate.
- themartorana 12y ago
  There is more money in the gullible than the educated. When you have some computer program that controls your snail mail output, it's very easy to mentally justify the distance you put between yourself and the advantage you're taking of the poor and downtrodden. That's where most of this lies. If you look at sleazy and then try to find the sleaze, more often than not they're rather separated from the reality of the harm they're actually doing.
- brc 12y ago
  I'm curious how you weren't more savvy with carloans and credit in general? Was it never discussed by your family? Did you ignore advice? It always seems completely obvious to me to steer clear of financing cars (never had a car loan, ever) yet I see so many others dive right in and end up very poor as a result.
bko 12y ago
> The investors can earn relatively high returns on securities that the rating agencies have deemed low-risk. Last time I checked, the most senior (AAA) tranches of subprime auto abs deals are priced at libor + 20. That means that the investor is willing to accept libor (essentially risk free rate) and 30 basis points on top of that. Is this a high return? Sure, if you compare it to prime auto loans that are priced libor + 20 but not compared to other securitized products. For instance, the senior tranche on collateralized loan obligations are being priced at libor + 160 on new deals. Overall, this article is especially poorly written in that it does little other than stoke the flames of hatred against wall street. The writer claims that people are being exploited but then profiles an unemployed woman who cosigned a $30k loan on a car for her teenage daughter. The dealership almost certainly should not have lent her the money but the owners of these securities will pay the price, at least the equity tranche that absorbs all the initial losses. After not paying for a while, the car will probably be repossessed and resold. The reason there is such appetite for these products is because of the low interest rate environment. Investment managers are desperate to earn a slightly higher return that the risk free rate. This is driving demand which explains why you saw the issuance of subprime abs explode over the last year and spreads tighten (spreads have widened later in the year though). Credit standards have probably degraded to try and meet the demand of abs securities, but that's inevitable. At the end of the day, the investors will pay the price. There could be another financial crisis and a massive bailout at the tax payer expense but I doubt this is the product to cause panic. Unless the default rate on auto loans reaches 30-40% a year and the market for used cars drops a similar amount. I think the value of an auto is a lot more objective than that of a home. I think it's interesting how high interest rate risky loans can be considered as sleazy while giving opportunities to the less fortunate is considered an admirable goal. These two are two sides of the same coin. Would it be better that people with less than perfect credit or generally considered higher risk not get any loans? Or the risk of those loans be picked up by tax-payers?
- toomuchtodo 12y ago
  > The reason there is such appetite for these products is because of the low interest rate environment. Investment managers are desperate to earn a slightly higher return that the risk free rate. This is driving demand which explains why you saw the issuance of subprime abs explode over the last year and spreads tighten (spreads have widened later in the year though). Credit standards have probably degraded to try and meet the demand of abs securities, but that's inevitable. This part terrifies me. Not because of auto loans, but as returns remain low (and in my opinion, structural changes have occurred that will keep rates low in perpetuity), investment money will continue to look for higher returns with no moral qualms. Like farm land: http://www.forbes.com/sites/joshuarogers/2014/09/23/dirt-cheap-investors-are-plowing-into-farmland-heres-why/ http://www.forbes.com/sites/joshuarogers/2014/09/23/dirt-che... Its easy to look past subprime auto lending and payday loan lenders, but what happens when natural resources necessary for survival (food and water in this case) are sold to the highest bidder?
volkadav 12y ago
"This package of loans returns N times the risk free rate of return but is just as safe, according to ratings agencies!" Do people really not remember 2008? Jesus. The problem of course is that a conflagration in one sector of the financial markets all too easily spreads to others (remember when it was just subprime mortgages that were in trouble? then when it was just mortgages? then when HOLY SHIT THE APOCALYPSE IS EXTREMELY NIGH, SELL EVERYTHING AND BUY SPAM/AMMO?), e.g. through highly leveraged and interwoven networks of derivatives. If (when) this goes tits up I hope there are enough risk analysts being listened to at the Too Big To Fail orgs that counter-party/swap risks are minimized to just the direct players in this market.
- duncan_bayne 12y ago
  Sure they remember. They remember that the last time this happened, taxpayers were fleeced to prop up the organisations and individuals who should have lost everything. Google 'moral hazard' for a more detailed explanation.
  - tzs 12y ago
    And they will do it again...one of the first things the new Congress did was repeal Dodd-Frank provisions that required banks to do some of their derivative trading in separate entities that were not FDIC insured.
princeb 12y ago
this is a good thing. all I see is that someone who would normally not have the ability to drive a BMW be able to enjoy the use of one - however temporarily. I do not believe I have the moral superiority nor the arrogance to determine what constitutes a "responsible" decision for another person, or make a value judgement for them without appreciation of their values, let alone forcing them on such a path. here are two parties - one who needs a car (and all the intangible satisfaction in excess of the basic utility that comes with it), and another who is willing to take extra risk on their capital for a bit more income. how presumptuous it is to stand between their relationship.
- Spooky23 12y ago
  There is a moral hazard here, which has nothing to do with arrogance or superiority. We have all sorts of predictive analytics and common sense that makes it pretty trivial to figure out that the 19 year old with no income can't afford 72 months of payments on the shiny new BMW. But who gives a shit? The buyer is ignorant. The salesman gets paid to move the car, the bank charging usurious rates makes a profit for the few months the buyer pays, and the repo-man with the license plate tracking recovers the asset. This is a problem, because none of these parties has any expectation that the counter party can fulfill the contract. That's a moral hazard, and arguably fraud. (Actually, if you are a private individual, it is fraud in most states! If you're a federally chartered bank, no problem) That's why before banking became a national industry we have usury laws. It's unfortunate that we have loopholes allowing states like South Dakota and Nevada to neutralize these laws.
  - mc32 12y ago
    Yes and no. I mean yes, there is a proscriptive world where we would tell people, 'sorry, you don't qualify' for reasons a, b and c. But there is also a world where those reasons mean that that tool is taken away from the poor, or at least the less financially savvy. Basically banks would turn more into an institution for people who have money and don't need a bank (financial institution). Perhaps a middle ground could be requiring people taking out these kinds of loans to receive two hours instruction on the side effects of taking out these loans and delivered by a consumer advocacy group --but without advocacy bias. Let them make their decision at the end of the day and put a three day waiting period in there.
kazinator 12y ago
I'm all for it. The winners here are the poor who get behind reasonable wheels, so they can improve their lives. The losers are some greedy suckers who believe in the future performance promises of some mutual fund. "I bought into an investment backed by a loan to some poor people to get cars ... boy did I get taken for a ride!" :)
ismail 12y ago
I find debt to be interesting, I think having debt, affects your decision making and your risk taking. Personally i have 0 amount of debt. No car payments, nor house payments. This has allowed me to move jobs if i was not happy, even without something concrete. Also a startup. I look at my peers, who were in a similar position as me. Some who have taken on home loans etc. they end up with the 'golden cuffs'. Though you could argue i have no assets to show. Other than a varied work experience, and ability to move into many different roles.
- bjelkeman-again 12y ago
  Best decision we ever made, do minimise or eliminate debt.
shenoyroopesh 12y ago
> Dane Carpe, of Creswell, Ore., lost his 2008 Dodge Charger when he could not repay the $17,116 he borrowed at a 23.74 percent interest rate. Credit Carl Kiilsgaard for The New York Times What?! 23.74%? That's nearly as bad as credit card debt. And for an auto loan? It's one thing to pay higher interest rate for credit risk, but totally another to not understand basic financials - if you already have bad credit, you want to build up your finances, not dig a deeper hole by purchasing things you cannot afford, at interest rates you cannot afford. A good case to improve financial literacy amongst the masses? I think this is equivalent to money-lenders in India fleecing poor, illiterate farmers who don't even understand the interest rate they are paying.
adamdeloach45 12y ago
Subprime borrowers are people having low or no credit ratings. Auto loans are easily available for borrowers with good credit but subprime borrowers have to put in extra efforts to get car loans learn here : http://www.autoloansforeverydriver.com/subprime-car-loan.php http://www.autoloansforeverydriver.com/subprime-car-loan.php
adamdeloach45 12y ago
These lenders offer you an online platform to obtain the approved bad credit auto loans no money downfor the car buying aspirants. Extreme easiness and expediency is experienced by customers as all works are being conducted online, and you have no necessity to walk down to the office of the car loan lender.http://www.carloan2.com/car-loan-for-bad-credit-no-money-down.php http://www.carloan2.com/car-loan-for-bad-credit-no-money-dow...

62 points by yablak 12y ago

Why not? There are winners and losers in every game.

The way bankruptcy laws are, 20% is probably pretty reasonable considering that the vehicle's value decreases pretty rapidly. I'm curious whether companies like Affirm will figure out ways to improve upon this.

cowsandmilk 12y ago
If you have good credit, you can get rates under 2% on a new car and your lender will negotiate a lower car price for you since that will lower their risk. If you have poor credit, you likely will end up at a sleazy dealership that overcharges you on the price and you end up with the 20% interest rate to take care of the risk.
- grandalf 12y ago
  Yep that's b/c the lender has drastically different levels of risk in each scenario. If you're a bank, you get negative overnight rates.
- stephenbez 12y ago
  How do you get a lender to negotiate a lower car price for you?
  - grandalf 12y ago
    To the extent that the collateral value of the purchased item impacts the lender's overall risk, all lenders have an incentive to drive down the purchase price to reduce risk (since this reduces the difference between the loan amount and the collateral value). The value of that risk reduction is relatively insignificant to the lender, but some offer services like that (car buying services) to help attract desirable borrowers.

icehawk219 12y ago

The ease with which huge amounts of credit are given to people who clearly shouldn't receive it is quite scary. When I was 18 I had a decent enough job as a fledgling software developer making above average for my age but still not great. My car broke down and I decided to get a new one and as a stupid 18 year old with access to some money and credit I of course set my eyes on a nice shiny, new off the lot, convertible. $20k in debt later I drove off the lot. And they were nice enough to throw in a brand new Bank of America credit card with a $10k limit on it too! It of course didn't take long for me to nearly max that out and end up with a crash course in credit that I wish I'd had beaten into me years earlier or that I was smart enough to figure out sooner. At 18 and making around $35k pre-tax I already had close to $30k in debt and the scary thing is that that situation lead to me getting bombarded with mail offers for more credit cards (including many different Bank of America cards) that I was supposedly pre-approved for. Now that I keep very little debt, besides my mortgage my 2 open cards have a balance of $0 on them 6 days out of 7, I get basically no offers. Education would go a long way to preventing what happened to me from happening to others but I can't help but suspect a healthy dose of tighter regulations, or restrictions, or ... something, should be put into place too. I now know I was a stupid kid who made stupid mistakes. I've also learned from them. But I was also someone in one of the few industries that's still growing and was able to recover fairly easily and never really felt any pain from it. The average person isn't that fortunate.

themartorana 12y ago
There is more money in the gullible than the educated. When you have some computer program that controls your snail mail output, it's very easy to mentally justify the distance you put between yourself and the advantage you're taking of the poor and downtrodden. That's where most of this lies. If you look at sleazy and then try to find the sleaze, more often than not they're rather separated from the reality of the harm they're actually doing.
brc 12y ago
I'm curious how you weren't more savvy with carloans and credit in general? Was it never discussed by your family? Did you ignore advice? It always seems completely obvious to me to steer clear of financing cars (never had a car loan, ever) yet I see so many others dive right in and end up very poor as a result.

bko 12y ago

> The investors can earn relatively high returns on securities that the rating agencies have deemed low-risk. Last time I checked, the most senior (AAA) tranches of subprime auto abs deals are priced at libor + 20. That means that the investor is willing to accept libor (essentially risk free rate) and 30 basis points on top of that. Is this a high return? Sure, if you compare it to prime auto loans that are priced libor + 20 but not compared to other securitized products. For instance, the senior tranche on collateralized loan obligations are being priced at libor + 160 on new deals. Overall, this article is especially poorly written in that it does little other than stoke the flames of hatred against wall street. The writer claims that people are being exploited but then profiles an unemployed woman who cosigned a $30k loan on a car for her teenage daughter. The dealership almost certainly should not have lent her the money but the owners of these securities will pay the price, at least the equity tranche that absorbs all the initial losses. After not paying for a while, the car will probably be repossessed and resold. The reason there is such appetite for these products is because of the low interest rate environment. Investment managers are desperate to earn a slightly higher return that the risk free rate. This is driving demand which explains why you saw the issuance of subprime abs explode over the last year and spreads tighten (spreads have widened later in the year though). Credit standards have probably degraded to try and meet the demand of abs securities, but that's inevitable. At the end of the day, the investors will pay the price. There could be another financial crisis and a massive bailout at the tax payer expense but I doubt this is the product to cause panic. Unless the default rate on auto loans reaches 30-40% a year and the market for used cars drops a similar amount. I think the value of an auto is a lot more objective than that of a home. I think it's interesting how high interest rate risky loans can be considered as sleazy while giving opportunities to the less fortunate is considered an admirable goal. These two are two sides of the same coin. Would it be better that people with less than perfect credit or generally considered higher risk not get any loans? Or the risk of those loans be picked up by tax-payers?

toomuchtodo 12y ago
> The reason there is such appetite for these products is because of the low interest rate environment. Investment managers are desperate to earn a slightly higher return that the risk free rate. This is driving demand which explains why you saw the issuance of subprime abs explode over the last year and spreads tighten (spreads have widened later in the year though). Credit standards have probably degraded to try and meet the demand of abs securities, but that's inevitable. This part terrifies me. Not because of auto loans, but as returns remain low (and in my opinion, structural changes have occurred that will keep rates low in perpetuity), investment money will continue to look for higher returns with no moral qualms. Like farm land: http://www.forbes.com/sites/joshuarogers/2014/09/23/dirt-cheap-investors-are-plowing-into-farmland-heres-why/ http://www.forbes.com/sites/joshuarogers/2014/09/23/dirt-che... Its easy to look past subprime auto lending and payday loan lenders, but what happens when natural resources necessary for survival (food and water in this case) are sold to the highest bidder?

volkadav 12y ago

"This package of loans returns N times the risk free rate of return but is just as safe, according to ratings agencies!" Do people really not remember 2008? Jesus. The problem of course is that a conflagration in one sector of the financial markets all too easily spreads to others (remember when it was just subprime mortgages that were in trouble? then when it was just mortgages? then when HOLY SHIT THE APOCALYPSE IS EXTREMELY NIGH, SELL EVERYTHING AND BUY SPAM/AMMO?), e.g. through highly leveraged and interwoven networks of derivatives. If (when) this goes tits up I hope there are enough risk analysts being listened to at the Too Big To Fail orgs that counter-party/swap risks are minimized to just the direct players in this market.

duncan_bayne 12y ago
Sure they remember. They remember that the last time this happened, taxpayers were fleeced to prop up the organisations and individuals who should have lost everything. Google 'moral hazard' for a more detailed explanation.
- tzs 12y ago
  And they will do it again...one of the first things the new Congress did was repeal Dodd-Frank provisions that required banks to do some of their derivative trading in separate entities that were not FDIC insured.

princeb 12y ago

this is a good thing. all I see is that someone who would normally not have the ability to drive a BMW be able to enjoy the use of one - however temporarily. I do not believe I have the moral superiority nor the arrogance to determine what constitutes a "responsible" decision for another person, or make a value judgement for them without appreciation of their values, let alone forcing them on such a path. here are two parties - one who needs a car (and all the intangible satisfaction in excess of the basic utility that comes with it), and another who is willing to take extra risk on their capital for a bit more income. how presumptuous it is to stand between their relationship.

Spooky23 12y ago
There is a moral hazard here, which has nothing to do with arrogance or superiority. We have all sorts of predictive analytics and common sense that makes it pretty trivial to figure out that the 19 year old with no income can't afford 72 months of payments on the shiny new BMW. But who gives a shit? The buyer is ignorant. The salesman gets paid to move the car, the bank charging usurious rates makes a profit for the few months the buyer pays, and the repo-man with the license plate tracking recovers the asset. This is a problem, because none of these parties has any expectation that the counter party can fulfill the contract. That's a moral hazard, and arguably fraud. (Actually, if you are a private individual, it is fraud in most states! If you're a federally chartered bank, no problem) That's why before banking became a national industry we have usury laws. It's unfortunate that we have loopholes allowing states like South Dakota and Nevada to neutralize these laws.
- mc32 12y ago
  Yes and no. I mean yes, there is a proscriptive world where we would tell people, 'sorry, you don't qualify' for reasons a, b and c. But there is also a world where those reasons mean that that tool is taken away from the poor, or at least the less financially savvy. Basically banks would turn more into an institution for people who have money and don't need a bank (financial institution). Perhaps a middle ground could be requiring people taking out these kinds of loans to receive two hours instruction on the side effects of taking out these loans and delivered by a consumer advocacy group --but without advocacy bias. Let them make their decision at the end of the day and put a three day waiting period in there.

kazinator 12y ago

I'm all for it. The winners here are the poor who get behind reasonable wheels, so they can improve their lives. The losers are some greedy suckers who believe in the future performance promises of some mutual fund. "I bought into an investment backed by a loan to some poor people to get cars ... boy did I get taken for a ride!" :)

ismail 12y ago

I find debt to be interesting, I think having debt, affects your decision making and your risk taking. Personally i have 0 amount of debt. No car payments, nor house payments. This has allowed me to move jobs if i was not happy, even without something concrete. Also a startup. I look at my peers, who were in a similar position as me. Some who have taken on home loans etc. they end up with the 'golden cuffs'. Though you could argue i have no assets to show. Other than a varied work experience, and ability to move into many different roles.

bjelkeman-again 12y ago
Best decision we ever made, do minimise or eliminate debt.

shenoyroopesh 12y ago

> Dane Carpe, of Creswell, Ore., lost his 2008 Dodge Charger when he could not repay the $17,116 he borrowed at a 23.74 percent interest rate. Credit Carl Kiilsgaard for The New York Times What?! 23.74%? That's nearly as bad as credit card debt. And for an auto loan? It's one thing to pay higher interest rate for credit risk, but totally another to not understand basic financials - if you already have bad credit, you want to build up your finances, not dig a deeper hole by purchasing things you cannot afford, at interest rates you cannot afford. A good case to improve financial literacy amongst the masses? I think this is equivalent to money-lenders in India fleecing poor, illiterate farmers who don't even understand the interest rate they are paying.

adamdeloach45 12y ago

Subprime borrowers are people having low or no credit ratings. Auto loans are easily available for borrowers with good credit but subprime borrowers have to put in extra efforts to get car loans learn here : http://www.autoloansforeverydriver.com/subprime-car-loan.php http://www.autoloansforeverydriver.com/subprime-car-loan.php

adamdeloach45 12y ago

These lenders offer you an online platform to obtain the approved bad credit auto loans no money downfor the car buying aspirants. Extreme easiness and expediency is experienced by customers as all works are being conducted online, and you have no necessity to walk down to the office of the car loan lender.http://www.carloan2.com/car-loan-for-bad-credit-no-money-down.php http://www.carloan2.com/car-loan-for-bad-credit-no-money-dow...